The Securities and Exchange Board of India (Sebi) on Wednesday floated a discussion paper to plug gaps in the buyback regulations.
At present, there is ambiguity on whether stand-alone and consolidated financials should be considered while evaluating various thresholds and conditions for buybacks. A company is permitted to conduct a buyback if its debt-equity ratio doesn’t exceed 2, after repurchase of securities.
However, neither the Companies Act nor Sebi buyback regulations specifically provide for consideration of stand-alone or consolidated financials for determining the requirement of debt-equity or free reserves. In the paper, Sebi has proposed that debt-equity ratio be considered on a consolidated basis, but should be excluded only if subsidiaries are regulated and have issuances with AAA-ratings.
Further, it states that the subsidiaries should have debt-equity ratio of below 5 on a stand-alone basis.
More importantly, Sebi has proposed that debt-equity ratio of 6 can be allowed for subsidiaries that are either non-banking financial companies (NBFCs) or housing finance companies (HFCs).
The Ministry of Corporate Affairs (MCA) had, in 2016, allowed government NBFCs and HFCs to conduct buybacks if their debt-equity ratio didn’t exceed 6. Further, NBFCs, HFCs and infra companies have typically high debt-equity, given the RBI allows them to have leverage of up to 7:1 for non-deposit-taking NBFCs with assets below Rs 500 crore.
The gaps in buyback regulations had come to the fore in January, after Sebi had rejected L&T’s Rs 9,000-crore buyback proposal. Though L&T’s stand-alone debt-equity ratio after the buyback would have been at comfortable levels of 0.5 times, it would have breached the threshold of 2 on a consolidated basis. The rejection had sparked a debate on whether Sebi should consider the debt on a standalone or consolidated basis, particularly if the subsidiary was in the business of financing, where high debts are a norm.